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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
0-23926
(Commission file number)
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GEOWORKS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 94-2920371
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6550 Vallejo Street, Suite 102
Emeryville, California 94608
(Address of principal executive offices) (Zip Code)
(510) 428-3900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the latest practicable date:
As of February 1, 2003, the Company had outstanding 22,134,757 shares of
Common Stock, $ 0.001 par value per share.
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1
GEOWORKS CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets: December 31, 2002 and March 31, 2002............... 3
Condensed Consolidated Statements of Operations: Three and Nine Months
ended December 31, 2002 and 2001 ....................................................... 4
Condensed Consolidated Statements of Cash Flows: Nine Months ended
December 31, 2002 and 2001.............................................................. 5
Notes to Condensed Consolidated Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 10
Risk Factors Affecting Future Operating Results........................................... 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 21
Item 4. Evaluation of Disclosure Controls and Procedures.......................................... 21
PART II. OTHER INFORMATION
Item 1. Litigation................................................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders....................................... 22
Item 5. Other Information......................................................................... 23
Item 6. Exhibits and Reports on Form 8-K.......................................................... 23
SIGNATURES AND CERTIFICATIONS...................................................................... 24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
December 31, March 31,
2002 2002
------ ------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 544 $3,136
Accounts receivable, net ............................. 543 823
Prepaid expenses and other current assets ............ 263 362
------ ------
Total current assets ............................... 1,350 4,321
Property and equipment, net ............................. 235 405
Long-term investments ................................... 2 2
Goodwill and other intangible assets, net ............... -- 2,001
------ ------
$1,587 $6,729
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 386 $ 554
Accrued liabilities .................................. 907 2,310
Deferred revenue ..................................... 230 424
------ ------
Total current liabilities .......................... 1,523 3,288
Other accrued liabilities ............................... -- 144
Stockholders' equity .................................... 64 3,297
------ ------
$1,587 $6,729
====== ======
See accompanying notes
3
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
December 31 December 31
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net revenues:
Professional services .............................. $ 906 $ 1,728 $ 2,557 $ 5,264
Software and related services (1) .................. 109 2,276 493 4,000
-------- -------- -------- --------
Total net revenues ............................... 1,015 4,004 3,050 9,264
Operating expenses:
Cost of professional services ...................... 569 1,110 1,864 3,550
Cost of software and related services .............. -- 196 -- 586
Sales and marketing ................................ 104 993 600 5,307
Research and development ........................... -- 1,308 -- 6,866
General and administrative ......................... 723 839 2,242 3,407
Amortization of goodwill and other intangible assets 69 1,036 487 4,927
Restructuring charges .............................. -- 400 -- 2,691
Write-down of goodwill and other long-lived assets . 439 12,129 1,158 27,557
-------- -------- -------- --------
Total operating expenses ......................... 1,904 18,011 6,351 54,891
-------- -------- -------- --------
Operating loss ........................................ (889) (14,007) (3,301) (45,627)
Other income (expense):
Other income ....................................... -- -- 60 3,994
Interest income .................................... 2 21 13 165
Interest expense ................................... -- (4) -- (7)
-------- -------- -------- --------
Loss before income taxes .............................. (887) (13,990) (3,228) (41,475)
Provision for income taxes ............................ 19 2 25 125
-------- -------- -------- --------
Net loss .............................................. $ (906) $(13,992) $ (3,253) $(41,600)
======== ======== ======== ========
Net income (loss) per share--basic and diluted ........ $ (0.04) $ (0.59) $ (0.14) $ (1.77)
======== ======== ======== ========
Shares used in per share computation--basic and diluted 22,185 23,648 22,911 23,548
======== ======== ======== ========
(1) Revenues from related parties .................. $ 92 $ 284 $ 273 $ 680
======== ======== ======== ========
See accompanying notes
4
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended December 31
-----------------------------
2002 2001
-------- --------
Operating activities:
Net loss .................................................................. $ (3,253) $(41,600)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ............................................................ 181 1,149
Amortization of goodwill and other intangible assets .................... 487 4,927
Write-down of goodwill and other long lived assets ...................... 1,158 28,476
Amortization of deferred compensation ................................... 75 183
Gain on sale of long-term investments ................................... -- (3,994)
Loss on cancellation of shareholder note ................................ 87 --
Changes in operating assets and liabilities ............................. (1,304) (1,165)
------ -------
Net cash used in operating activities ........................................ (2,569) (12,024)
------ -------
Investing activities:
Purchases of property and equipment - net ................................. (34) (1,707)
Proceeds from sales of long-term investments .............................. -- 3,994
-------- --------
Net cash provided by (used in) investing activities .......................... (34) 2,287
-------- --------
Financing activities:
Payments of capital lease and debt obligations ............................ -- (21)
Net proceeds from issuance of common stock ................................ -- 167
-------- --------
Net cash provided by financing activities .................................... -- 146
-------- --------
Foreign currency translation adjustments ..................................... 11 (69)
-------- --------
Net decrease in cash and cash equivalents .................................... (2,592) (9,660)
Cash and cash equivalents at beginning of period ............................. 3,136 13,713
-------- --------
Cash and cash equivalents at end of period ................................... $ 544 $ 4,053
======== ========
See accompanying notes
5
GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated financial statements for the three and nine months
ended December 31, 2002 and 2001 are unaudited but reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the consolidated financial
position and results of operations for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in Geoworks Corporation's (the "Company's") Annual Report to
Shareholders on Form 10-K for the fiscal year ended March 31, 2002. The results
of operations for the three and nine months ended December 31, 2002 are not
indicative of the results to be expected for the entire fiscal year. In
particular, in February 2003, the Company announced that it was ceasing
operations in the UK. As a result the Company's continuing sources of revenue
will be minimal and its operations will significantly reduced. See Note 7.
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. To date, the
Company has incurred substantial operating losses and cash flow deficits, and
expects to incur additional operating losses in fiscal 2003. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company is trying to improve its prospects for continuing in business by way
of sales or licensing of assets and technology, by resolving various contractual
liabilities, and by continuing to explore limited opportunities for a
transaction which could potentially result in the continuation of the Geoworks
corporate entity or shell through the sale of a controlling capital stock
interest. In order to pursue such opportunities, management intends to wind down
all existing operations as quickly and efficiently as practical. If no third
party agrees to acquire control of Geoworks in a transaction that the board of
directors considers to be in the best interest of shareholders and creditors,
then it is likely that the company will be liquidated through bankruptcy within
the next three to six months. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
assets and liabilities that might be necessary should the Company be unable to
continue as a going concern.
Certain reclassifications have been made to the prior period's financial
statements to conform to the current period's presentation.
2. Net Loss Per Share
Basic net loss per share information for all periods is presented in accordance
with the requirements of Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"). Basic earnings per share is computed using the
weighted average number of shares of common stock outstanding during the period
and excludes any dilutive effects of outstanding common stock equivalents. The
effect of potentially dilutive stock options has been excluded from the
computation of diluted net loss per share because the effect of their inclusion
would be antidilutive.
3. Comprehensive Loss
Comprehensive loss consists of the following (in thousands):
Three Months Ended Nine Months Ended
December 31 December 31
-----------------------------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net loss .................................. $ (906) $(13,992) $ (3,253) $(41,600 )
Realized gains on investment and derivative
instruments ............................. -- -- -- (4,036)
Foreign currency translation adjustments .. (4) 29 11 (70)
-------- -------- -------- --------
Comprehensive loss ........................ $ (906) $(13,963) $ (3,242) $(45,706)
======== ======== ======== ========
6
GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Restructuring Charges
The fiscal 2003 activities relating to restructuring have consisted of resolving
obligations that arose from the various reorganizations and restructurings
during fiscal 2002. No new restructuring charges have been recorded in fiscal
2003.
In June 2001, the Company reorganized its operations, exited the Mobile ASP
market and accelerated the integration of its two software platforms, Mobile
Server+ and the AirBoss Application Platform, into a single integrated product
offering for enterprise applications. In connection with this reorganization,
the Company terminated approximately 22% of its workforce. In October 2001, as a
result of market uncertainties and a lack of market visibility, in particular
the impact of delayed buying decisions by wireless carriers for the types of
products and services the Company provided with the AirBoss Application
Platform, the Company announced a number of cost cutting measures to conserve
its resources, including terminating approximately 45% of its workforce. Because
of continued market uncertainty and the inability to generate cash through
strategic alternatives, in January 2002, the Company announced its exit from the
software products business and additional cost cutting measures, including
terminating 45% of its remaining workforce. In particular, the Company's Board
of Directors concluded it would be in the best interest of the Company to sell
the AirBoss assets and to focus on realizing the value of the professional
services business.
The restructuring charges consist of severance payments to the terminated
employees, accrual for related contract termination costs and the lease
termination costs as a result of these actions.
The following table summarizes the restructuring activity (in thousands):
Severance Lease Contract
and related termination termination
charges costs costs Total
Restructuring liabilities at March 31, 2002 $ 553 $ 510 $ 171 $ 1,234
Amounts paid .............................. (304) (485) (79) (868)
------- ------- ------- -------
Restructuring liabilities at December 31,
2002 (other accrued liabilities) ....... $ 249 $ 25 $ 92 $ 366
======= ======= ======= =======
7
GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Write-down of Goodwill and Other Long-lived Asset Charges
On July 24, 2000, we acquired substantially all of the assets of an established,
separate, and unincorporated division of Telcordia Technologies, Inc.
("Telcordia"), consisting of Telcordia's AirBoss Business Unit, which operated a
software and wireless technology services business ("AirBoss"). The transaction
was accounted for using the purchase method of accounting and gave rise to the
recognition of purchased intangibles and goodwill. These intangible assets were
amortized over their respective estimated useful lives to their estimated
residual values, and through fiscal 2002, reviewed for impairment in accordance
with FASB No. 121, Accounting for the Impairment of Long-lived Assets and
Long-lived Assets to be Disposed Of. These reviews and the decision to sell the
AirBoss assets resulted in the recording of write downs of goodwill and other
intangible assets of $27.6 million during fiscal 2002.
In fiscal 2003, the Company adopted FAS No. 142, Goodwill and Other Intangible
Assets and FAS 144, Accounting for the Impairment and Disposal of Long Lived
Assets. FAS 142 requires goodwill to be tested for impairment under certain
circumstances, and written down when impaired, rather than being amortized as
previous standards required. Furthermore, FAS 142 requires purchased intangible
assets other than goodwill to be amortized over their useful lives unless these
lives are determined to be indefinite. FAS 144 retains many of the fundamental
recognition and measurement provisions of FAS 121 with respect to the impairment
of long lived assets. We have performed quarterly assessments of the carrying
values of intangible assets recorded in connection with our acquisition of
AirBoss. The assessments have been performed in light of the significant
negative industry and economic trends impacting current operations, the decline
in our stock price, expected future revenues, and continued operating losses. In
the three months ended June 30, 2002, the Company recorded a non-cash impairment
write-down of the remaining AirBoss intangible assets of $719,000, the estimated
realizable value at that time. In December 2002, the remaining balances were
determined to be fully impaired and were written off based on the assessment
factors noted above as well as the Company's limited remaining financial and
technical resources.
The following table presents details of the activity of the Company's intangible
assets (in thousands):
Balance at
Balance at Amortization Impairment Transaction December 31,
March 31, 2002 Expense Write-downs Reductions 2002
-------------- ------------ ----------- ---------- -----------
Technology ... $1,730 $ 400 $ 974 $ 356 $ --
Patents ...... 271 87 184 -- --
------ ------ ------ ------ ---------
$2,001 $ 487 $1,158 $ 356 $ --
====== ====== ====== ====== =========
In August 2002, the Company agreed to settle an obligation of approximately
$290,000 to Telcordia for $100,000, to be paid in installments of $50,000 on
August 2, 2002, $25,000 by December 31, 2002 and an additional $25,000 by March
31, 2003. Telcordia is a wholly owned subsidiary of Science Applications
International Corporation ("SAIC"), the Company's largest shareholder. The
Company also assigned to Telcordia any future amounts payable to Geoworks from
SAIC under a non exclusive, object code license to the AirBoss technology with
SAIC executed in October 2001. Management believes that these amounts would be
negligible and subject to offset. Additionally, Geoworks and Telcordia agreed to
terminate their AirBoss value added reseller agreement early. In a separate
transaction, the Company and SAIC revised an existing license agreement to grant
SAIC a non-exclusive source code license to the AirBoss technology and the right
to make derivative works based on AirBoss. The agreement also terminated the
Company's maintenance obligations and eliminated both parties' ability to
terminate the agreement early. In return, SAIC agreed to transfer 1,391,440
shares of Geoworks stock back to the Company for cancellation. The carrying
value of the Company's intangible assets was reduced by the fair value of the
liabilities relieved and the Geoworks common stock returned in these
transactions. The Geoworks common shares returned were valued based on the
market value of Geoworks shares at August 21, 2002, the date of the agreement.
The Board of Directors approved these transactions based on the recommendation
of the Audit Committee.
8
GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Cancellation of Stockholder Note
In January 2003, the Company settled a dispute regarding a note receivable from
a stockholder who was formerly an employee of the Company. The note was
cancelled, the 50,000 shares of Company common stock held as collateral for the
note were returned and cancelled, the Company was paid the interest receivable
on the note, and the stockholder and the Company agreed to release each other
from all claims. The Company recorded a loss of approximately $87,000
representing the difference between the value of the collateral and the face
value of the note at the time of the settlement. This non-cash expense is
included in general and administrative expense for the three months ended
December 31, 2002.
7. Subsequent Event: Ceasing Operations in the UK
In February 2003, the Company announced that it was ceasing operations in the UK
and had entered into a mutual release agreement with Teleca Ltd. ("Teleca")
which allowed Teleca to hire the Company's former UK employees and to engage in
business with the Company's former customers. In consideration of the release,
Teleca agreed to pay the Company approximately $500,000, one half on signing the
release and the balance after ninety days. Also, Teleca separately agreed to
assume the UK subsidiary's remaining lease obligations in exchange for the
subsidiary's equipment, which had a net book value of approximately $200,000.
The proceeds received by the Company in connection with the release exceed the
carrying value of UK subsidiary's net assets and the Company expects to record a
net gain of approximately $250,000 in the three months ending March 31, 2003 as
a result of the release.
The following tables presents unaudited results of the UK Operations for the
periods noted (in thousands):
Three Months Ended Nine Months Ended
------------------------- -------------------------
December 31. December 31, December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
Net Revenues ........ $ 829 $ 722 $ 2,262 $ 1,661
Operating gain (loss)... 121 $ 16 $ 129 $(1,067)
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), regarding future events and management's plans and expectations. When
used in this Report, the words "believe", "estimate", "project", "intend",
"expect" and "anticipate" and similar expressions are intended to identify such
forward-looking statements. Such statements are subject to certain risks and
uncertainties, including those discussed below, which could cause actual results
to differ materially from those projected. These statements include but are not
limited to our intentions and expectations regarding: our limited cash
resources; our dependence on one customer for almost all of our revenues; our
ability to sell control of the Company or any of its remaining assets; our
ability to terminate certain contractual obligations on acceptable terms;
economic conditions, and the health of financial markets in general. These
statements are subject to risks and uncertainties that could cause actual
results and events to differ materially. Other factors that may contribute to
such differences include, but are not limited to, those discussed in the section
of this Report titled "Risk Factors " beginning on page 18 as well as those
discussed elsewhere in this Report. Consequently, the inclusion of
forward-looking information should not be regarded as a representation by us or
any other person that our objectives or plans will be achieved or that the
identified risks are the only risks facing us. The reader is cautioned not to
place undue reliance on the forward-looking statements contained in this Report,
which speak only as of the date this Report was published. We undertake no
obligation to publicly release updates or revisions to these statements.
Ceasing Operations in the UK and Remaining Alternatives
Our weak financial position made it increasingly difficult to maintain a viable
ongoing business in the UK. In particular, our UK employees had been recruited
heavily by third parties while the proposed sale of our UK subsidiary and its
professional services business" to Teleca Ltd (the "Proposed Sale) was under
consideration. These employees' perceived uncertainty only intensified when the
Proposed Sale was not approved as a result of our failure to secure a quorum for
the special shareholders meeting. Our limited resources made it unlikely that we
could cover our already reduced cost structure for much longer, much less absorb
the costs of any decrease or interruption in our revenues associated with
employee attrition or resulting customer dissatisfaction. Faced with this
significant possibility of failing to meet our obligations, we entered into a
mutual release agreement with Teleca (the "Release") that allowed Teleca to hire
our former UK employees and do business with our customers in an effort to
minimize our liabilities.
In consideration of this Release, Teleca agreed to pay the Company approximately
$500,000, one half on signing the Release and the balance after ninety days.
Also, Teleca separately agreed to assume our UK subsidiary's remaining lease
obligations in exchange for use of the subsidiary's equipment. By agreeing to
enter this Release we estimate that we have avoided approximately $300,000 of
statutory employee severance and over $400,000 of future lease obligations. In
addition, we believe that we have mitigated any exposure we might have had to
our primary customer, Nokia, by encouraging Teleca and Nokia to deal directly
with each other in order to limit disruption to Nokia's activities.
We had planned to conclude the Proposed Sale with Teleca pursuant to the terms
of the September 23, 2002 share transfer agreement that expired in January but
were unable to do so, because we could not secure a quorum for the required
special shareholders meeting. (On October 30, 2002, we filed a definitive proxy
to obtain shareholder approval of this sale to Teleca.) Those terms called for
Teleca to pay $2.3 million dollars for the Macclesfield based business with $.3
million held back as an offset to potential claims related to various warranties
until March 31, 2004. Under the Proposed Sale terms, there would have been
approximately $500,000 in net assets, including $500,000 in cash, in the UK
subsidiary at closing. If the Proposed Sale had been consummated, Teleca would
have acquired all the shares in our UK subsidiary which has rights in various
personal property, intellectual property, various customer contracts (including
those with Nokia and Toshiba) and significant operating loss tax carryforwards.
No shares, intellectual property, customer contracts or tax attributes were
transferred by the Release.
10
Management continues to explore limited opportunities for a transaction which
could potentially result in the continuation of the Geoworks corporate shell
through the sale of a controlling stock interest. These opportunities would
likely involve substantial dilution of ownership to the existing Geoworks
shareholders and would likely change both the business and management of the
company. Even though the potential for shareholder return in such a transaction
is quite speculative, we believe that such an outcome may be preferable to the
prospect of zero return in bankruptcy. As we continue to pursue such
opportunities, management intends to wind down all existing operations as
quickly and efficiently as practical. If no third party agrees to acquire
control of Geoworks in a transaction that our board of directors considers to be
in the best interest of shareholders and creditors, then we plan to liquidate
the company through bankruptcy within the next three to six months.
We are making every reasonable effort with our two remaining full time
equivalent employees to meet our obligations, to limit our liabilities, to
conserve resources and to limit contingent liabilities in order to make the
corporate shell more attractive to a third party. There can be no assurance that
we will be able to meet our legal and financial obligations for any extended
period of time, and time is limited for entering into any transaction that could
preempt the need for bankruptcy.
Historical Overview
From our initial public offering in 1994 through early 1999, we were focused on
developing and selling wireless operating systems for smart phones and PDA's
(personal digital assistants). Our customers were large mobile phone
manufacturers who paid us research and development fees to develop software and
agreed to pay us royalties based on the number of phones they shipped with our
operating system. This market did not develop as rapidly as we expected and in
mid-1998, several of the world's largest handset makers including Nokia,
Motorola, Ericsson and Matsushita, representing over half of our target market,
created a joint venture to develop their own mobile operating system. Therefore,
in response to the slow growth in the market, the increased competition and the
loss of key Original Equipment Manufacturers ("OEM") prospects, we shifted our
focus to the development of mobile server software for mobile commerce and
information services. By the fourth quarter of fiscal 1999, we had discontinued
development of our smart phone operating system (GEOS SC(TM)) and licensed the
source code, on a non-exclusive basis, to one of our major OEM customers,
Mitsubishi Electric Corporation ("Mitsubishi") whom we continued to support
through a professional services consulting agreement through March 2002.
In the following year, our fiscal 2000, our research and development and sales
and marketing efforts were targeted at our mobile software and services, in
particular our Mobile ASP (Application Service Provider) offering, based on our
Mobile Server+ software. We also continued to provide engineering services to
some OEM customers, however such services were provided through professional
services consulting contracts, rather than as customer funded research with
potential product royalties.
In July 2000, we broadened our software product and service offering by
acquiring the AirBoss Application Platform and the AirBoss Business Unit
("AirBoss") from Telcordia Technologies, Inc. ("Telcordia"). Telcordia and its
parent, Science Applications International Corporation ("SAIC") became our
largest shareholder. We established an office in New Jersey to continue the
research, development, and deployment of the AirBoss line of patented mobile
communications software products, as well as to service the various third
parties whose contractual rights with Telcordia were assigned to us as part of
the acquisition. In June 2001, we reorganized our operations, exited the Mobile
ASP market and accelerated the integration of our two software platforms, Mobile
Server+ and the AirBoss Application Platform, into a single integrated product
offering for enterprise applications.
Through January 2001, we had been able to successfully raise capital through
public offerings, a number of private placements and through our employee stock
option plans. However, raising capital became increasingly difficult due to the
uncertainty in the market as a whole and in the wireless and telecommunications
industry, in particular. In August 2001, we engaged an investment banker to
assist us in considering our strategic alternatives.
In October 2001, as a result of market uncertainties and a lack of market
visibility, in particular the impact of delayed buying decisions by wireless
carriers for the types of products and services we provided with our AirBoss
Application Platform, we announced a number of cost cutting measures to conserve
our resources, including terminating approximately 45% of our workforce. Because
of continued market uncertainty and the inability to generate cash through
strategic alternatives, in January 2002, we announced our exit from the software
products business and additional cost cutting measures, including terminating
45% of our remaining workforce. In particular,
11
we concluded it would be in the best interest of our company to try to sell our
AirBoss assets in order to focus on realizing the value of our professional
services business.
In April 2002, Steve W. Mitchell, our former Vice President of Human Resources,
replaced David L. Grannan as President and Chief Executive Officer and Mr.
Grannan assumed the role of Chairman of the Board of Directors of the Company.
Since the January 2002 announcements we have continued to explore the sale of
AirBoss and our other legacy products. Several patents were sold during the
fourth quarter of fiscal 2002 and the GEOS-SC source code was recently sold to
Mitsubishi during the fourth quarter of fiscal 2003. Additionally, we have
terminated the leases of our former facility in New Jersey and our Company
headquarters in Alameda, California and relocated our headquarters to a
significantly smaller office space in Emeryville, California. As of April 1,
2002, operations consisted entirely of personnel supporting the professional
services business. As of February 1, 2003, there were only two full time
equivalent employees in the US.
In the current fiscal year, until the Release took effect in February 2003, our
operating focus had been on managing our professional services business, in
particular adding additional customers. As Mitsubishi, the primary customer of
our US based professional services team, which generated $4,624,000, or 61%, of
our professional services revenue, for fiscal 2002, did not renew its contract
when it concluded in March 2002, we have actively marketed the services of our
teams in the US and UK. We were able to add four additional customers, two in
the US and two in the UK, however the revenue generated in the current fiscal
year from these new customer contracts, approximately $370,000, is significantly
less than $1 million plus per quarter recorded from Mitsubishi in the prior
year, as discussed in the results of operations below. Consequently, although we
were able to maintain a small team of engineers in the US, the financial results
of our professional services have business suffered during this fiscal year. Our
contracts with all of the customers we have added in the current fiscal year
were for significantly smaller amounts and have been shorter in duration than
the contract we had with Mitsubishi and the contracts we have with Nokia, our
primary customer in the current fiscal year, prior to our recent closing of our
UK office.
During this fiscal year, we have also made various changes in our board of
directors to address the changing needs of the Company. Most recently, in
January 2003, the size of the board was reduced to three. The board currently
consists of Mr. Mitchell, Mr. Grannan and David J. Domeier.
As a result of our decision to exit from the software products business during
the last quarter of fiscal 2002 and our February 2003 decision to cease
operations in the UK, much of the following discussion of our historical
operating results is not relevant. Our current continuing business is limited to
subcontracting any requirements of Toshiba and one other customer. Consequently,
readers should focus on the company's liquidity, limited prospects for a sale of
control transaction with highly speculative shareholder return potential and the
imminence of a bankruptcy liquidation with scant prospects of any shareholder
return, keeping in mind that this discussion reflects management's current
beliefs, intentions and expectations. Statements made in this discussion are
subject to risks and uncertainties that could cause actual results and events to
differ materially.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations is
based upon our Condensed Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these Condensed Consolidated
Financial Statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, and expenses, and related
disclosure of contingent assets and liabilities. We evaluate, on an ongoing
basis, our estimates and judgments, including those related to revenue
recognition, bad debts, intangible assets, income taxes, restructuring charges,
contingencies such as litigation, and other complexities typical in our
industry. We base our estimates on historical experience and other assumptions
that we believe to be reasonable under the circumstances. Actual results may
differ from those estimates.
We believe the accounting policies described below, among others, are the ones
that most frequently require us to make estimates and judgments, and therefore
are critical to the understanding of our results of operations:
12
Revenue Recognition and Allowances. Professional services projects involve
consulting related to technology previously developed by us, as well as
development of new technologies supporting mobile communications. Professional
services revenues are generally billed and recognized based on time and
materials expended by us at contracted rates.
Probability of collection is assessed on a customer by customer basis. Customers
are subjected to a credit review process that evaluates the customers' financial
position and ultimately their ability to pay. If it is determined from the
outset of an arrangement that collection is not probable based upon our review
process, revenue is recognized upon cash receipt.
We also maintain a separate allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
analyze accounts receivable and historical bad debts, customer concentrations,
customer solvency, current economic and geographic trends, and changes in
customer payment terms and practices when evaluating the adequacy of the
allowance for doubtful accounts. If the financial condition of our customers
deteriorates, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Intangible Assets. Certain intangible assets such as technology and patents are
amortized to operating expense over time. When impairment indicators are
identified with respect to recorded intangible assets, the values of the assets
are determined using discounted future cash flow techniques, which are based on
estimated future operating results. Significant management judgment is required
in the forecasting of future operating results which are used in the preparation
of projected discounted cash flows.
Income taxes. Significant management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities, and any
valuation allowance recorded against the net deferred tax assets. The
determination of our tax provision is subject to judgments and estimates due to
operations outside the United States.
Results of Operations
Three Months Ended Change Nine Months Ended Change
------------------- -------------------- ------------------- -------------------
December December December December
31, 2002 31, 2001 $ % 31, 2002 31, 2001 $ %
Net revenues (in thousands):
Professional services ......... $ 906 $ 1,728 $ (822) (48)% $ 2,557 $ 5,264 $(2,707) (51)%
Software and related services . 109 2,276 (2,167) (95) 493 4,000 (3,507) (88)
------- ------- ------- ----- ------- ------- ------- ------
Total net revenues ............... $ 1,015 $ 4,004 $(2,989) (75)% $ 3,050 $ 9,264 $(6,214) (67)%
======= ======= ======= ===== ======= ======= ======= ======
Net Revenues
Professional services revenue. Professional services revenue decreased by
$822,000, or 48%, and $2,707,000, or 51%, in the three and nine months ended
December 31, 2002, respectively, in comparison with the corresponding periods of
the prior fiscal year. The decreases are attributable to a decrease in the
number of hours billed for client projects during the periods, resulting
primarily from the non-renewal of our contract with one of our two primary
customers, Mitsubishi, which had accounted for approximately $1.0 and $3.6
million dollars of revenue in the three months and nine months ended December
31, 2001. We do not expect to generate any significant professional services
revenue from this customer for the foreseeable future. Professional services
revenues from our remaining primary customer, Nokia, were approximately $770,000
and $2.2 million in the three and nine months ended December 31, 2002,
respectively, as compared to approximately $700,000 and $1.6 million,
respectively in the same periods of the prior fiscal year. Nokia professional
services revenues increased as compared to the prior fiscal year because we have
added resources to these projects in the current quarter and because we had
experienced a reduction in the volume of services provided to Nokia due to a
short term gap between the conclusion of contracts and the signing of new
contracts with Nokia in the three months ended September 20, 2001. We added new
customer revenues of approximately $370,000, under short term contracts in the
nine months ended December 31,
13
2002. Our contracts with all of the customers we have added in the current
fiscal year were for significantly smaller amounts and have been shorter in
duration than the contract we had with Mitsubishi and the contracts we have with
Nokia, our primary customer in the current fiscal year, prior to our recent
closing of our UK office.
As discussed above, in February 2003 we entered into a mutual release agreement
with Teleca in order to allow them to hire our UK employees in order minimize
our potential liabilities and to satisfy our outstanding obligations. We
therefore do not expect to have any significant level of professional services
revenue in the foreseeable future.
Software and related services revenue. Software and related services revenue
decreased by $2.2 million, or 95%, and $3.5 million, or 88%, in the three and
nine months ended December 31, 2002, respectively, in comparison with the
corresponding periods of the prior fiscal year. These substantial decreases
reflect our decision to exit from the software products business, in particular
the AirBoss application product line, as announced in January 2002. Most of our
software and related services revenues for the three and nine months ended
December 30, 2002 came from a continuing Mobile Server+ contract with Toshiba
for which license and maintenance support fees are being recognized into revenue
over the remaining contract term. The contract also allows us to share in the
revenue of the licensee. For the nine months ended December 31, 2002, revenues
from the Mobile Server+ license with Toshiba, a related party, were
approximately $300,000. We do not expect to generate significant software
revenues from our current software and related services contracts. The noted
contract for Mobile Server+ expires in September 2004. We believe that we can
contract with others, including Teleca, to provide any services due to Toshiba
under the existing agreement.
The software revenues recognized in the nine months ended December 31, 2001 of
the prior fiscal year consisted of $3,220,000 from the AirBoss product line,
$526,000 from legacy operating systems royalties and applications, and $254,000
from our Flex UI patent licensing program. The Airboss product line revenues for
the three and nine months ended December 31, 2001 included $1,750,000 of
non-recurring license fees and royalties received in connection with the
conclusion of an Airboss license agreement with GoAmerica, Inc. The Flex UI
patents were sold in the last quarter of fiscal 2002.
Operating Expenses
Cost of Professional Services. Cost of professional services are those expenses
incurred to provide professional services consulting, including compensation,
travel, other direct costs, and facilities overhead. Cost of professional
services decreased by $541,000, or 49%, to $569,000 for the three months ended
December 31, 2002 as compared to the same period of the prior fiscal year. For
the nine months ended December 31, 2002, cost of professional services decreased
$1,686,000, or 47%, to $1,864,000 as compared to the six months ended September
30, 2001. These decreases are due to the reduced level of professional services
provided as discussed above, which was due primarily to the non-renewal of the
contract of one of our two primary professional services customers from the
prior fiscal year.
Our professional services personnel have been located in the Emeryville,
California ("US staff") and Macclesfield, England ("UK staff"). In the fiscal
year ended March 31, 2002, our US staff and the costs of consultants engaged to
assist them were expended primarily to serve Mitsubishi. The decreases in cost
of professional services are primarily attributable to reduced costs as the team
was reduced and the consultants were not required in the three and nine months
ended December 31, 2002. This decrease was partially offset by increased costs
of our UK staff. UK staff costs increased approximately 35%, as the team was
increased based on increased billings and opportunities with our primary
customer in the UK and our other sales prospects.
We had approximately the same number of professional services employees at
December 31, 2002 as we did at December 31, 2001. However the ratio between US
staff and UK staff has changed based on the related customer billing levels and
opportunities. The UK staff had increased by 53%, whereas US staff has decreased
by 55% at December 31, 2002 as compared to December 31, 2001. As the market
salary rates for UK staff, in general, are less than those of their US
counterparts, we have experienced a 13% decrease in payroll costs in the nine
months ended December 31, 2002 as compared to the nine months ended December 31,
2001.
As a result of our ceasing operations in the UK in February 2003, we no longer
have any professional services staff and we do not expect to incur any
significant level of costs of professional services in the foreseeable future.
Gross margin percentages on professional services revenues were 37% and 55%
during the three months ended December 31, 2002 and 2001, respectively, and 27%
and 33% during the nine months ended December 31, 2002
14
and 2001, respectively. Gross margin is calculated as our professional services
revenues less cost of professional services. Gross margin percentage is
calculated as our gross margin divided by our professional services revenues.
The gross margin recognized on such services is subject to several variables,
including the average rates charged for these services, the average rates of
compensation of our engineering personnel, our ability to hire and retain
engineering personnel at competitive rates, the relative use of more expensive
subcontracted consultants, currency exchange rates and the utilization rates of
engineering personnel.
Gross margin percentages have declined in the three and nine months ended
December 31, 2002 as compared to the same periods of the prior fiscal year
because of several factors: in particular, although our average rates of
compensation were less due to the shift to increased use of UK staff, the
average billing rates for the three and nine months ended December 31, 2002 were
significantly lower than in the prior year periods as a result of the non
renewal of the Mitsubishi contract. In addition, we contracted for near break
even business in our Emeryville office in order to maintain the team for future
opportunities. Also, we added professional services staff in the UK office in
order to increase our revenue generating potential and we have incurred
additional expenses to hire and train these personnel. Finally, the gross margin
percentage is lower because the professional services business is absorbing a
higher portion of the facilities overhead costs as a result of the termination
of the software business employees.
Cost of Software and Related Services. Cost of software and related services is
comprised primarily of expenses incurred to provide software customization
services, including labor, direct costs and related overhead of these projects,
as well as license payments to third parties for software that is incorporated
into our software. Cost of software and related services expense decreased
$196,000 and $586,000, or 100%, to zero during the three and nine months ended
December 31, 2002, respectively, as compared with the same periods of the prior
fiscal year, primarily as a result of our exit from the software products
business. Our current software and related services revenues, principally our
license agreement with Toshiba, is not expected to require any significant level
of such costs in the foreseeable future.
Sales and Marketing. Sales and marketing expenses include salaries, benefits,
sales commissions, travel and related facilities overhead expense for our sales
and marketing personnel. Sales and marketing expense decreased by $889,000, or
90%, to $104,000, and by $4,707,000, or 89%, to $600,000, during the three and
nine months ended December 31, 2002 and 2001, respectively. These decreases in
sales and marketing expenses were primarily attributable to the reductions we
made to our workforce in fiscal 2002 to decrease our expenses and to shift our
strategic focus to our professional services business. The cost cutting measures
also resulted in significantly reduced spending on marketing programs. The
number of sales and marketing employees at December 31, 2002 was 2 as compared
to 16 at December 31, 2001. As a result of our ceasing operations in the UK in
February 2003, we no longer have any sales and marketing staff and we do not
expect to incur any significant level of sales and marketing expense in the
foreseeable future.
Research and Development. Research and development expenses consist primarily of
salaries and benefits for software engineers, contract development fees, costs
of computer equipment used in software development and related facilities
overhead expense. Research and development expense decreased by $1,308,000 and
$6,866,000, or 100%, to zero, during the three and nine months ended December
31, 2002, respectively, as compared with the same periods of the prior fiscal
year. The number of research and development employees at December 31, 2002 was
zero as compared to 30 at December 31, 2001. Because of our January 2002
reorganization and the February 2003 ceasing of operations in the UK all
development has ended and therefore we do not expect to incur research and
development expenses in the foreseeable future.
General and Administrative. General and administrative expenses include costs
for human resources, finance, legal, general management functions, and the
related facilities overhead. General and administrative expense decreased by
$116,000, or 14%, to $723,000, and by $1,165,000, or 34%, to $2,242,000, during
the three and nine months ended December 31, 2002 and 2001, respectively.
Decreased general and administrative expenses were the result of the various
reorganizations and cost cutting measures implemented during fiscal 2002. As a
public company with reporting obligations, we have had greater general and
administrative expense requirements than many private companies of our size
would incur. The number of general and administrative employees at December 31,
2002 was 8 as compared to 15 at December 31, 2001. As of February 1, 2003, we
have two remaining full time equivalent general and administrative employees who
are working to wind down our affairs, satisfy our reporting obligations as a
public company, and to pursue any limited prospects for a change in control
transaction.
15
Amortization of goodwill and other intangible assets. Amortization of goodwill
and other intangible assets of $487,000 during the nine months ended December
31, 2002 and $4,927,000 during the nine months ended December 31, 2001 was
attributable to the amortization of goodwill and other purchased intangible
assets resulting from our July 2000 acquisition of AirBoss. The amortization for
the three and nine months ended December 31, 2002 was lower than in the same
periods of the prior fiscal year because the underlying intangibles base was
reduced during fiscal 2002 and the first quarter of fiscal 2003 by write downs
due to value impairments.
Write-down of goodwill, intangibles and other long-lived assets. On July 24,
2000, we acquired substantially all of the assets of an established, separate,
and unincorporated division of Telcordia Technologies, Inc. ("Telcordia"),
consisting of Telcordia's AirBoss Business Unit, which operated a software and
wireless technology services business ("AirBoss"). The transaction was accounted
for using the purchase method of accounting and gave rise to the recognition of
purchased intangibles and goodwill. These intangible assets were amortized over
their respective estimated useful lives to their estimated residual values, and
through fiscal 2002, reviewed for impairment in accordance with FASB No. 121,
Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be
Disposed Of. These reviews and the decision to sell the AirBoss assets resulted
in the recording of impairment write-downs of goodwill and other intangible
assets of $27.6 million during fiscal 2002.
In fiscal 2003, the Company adopted FAS No. 142, Goodwill and Other Intangible
Assets and FAS 144, Accounting for the Impairment and Disposal of Long Lived
Assets. FAS 142 requires goodwill to be tested for impairment under certain
circumstances, and written down when impaired, rather than being amortized as
previous standards required. Furthermore, FAS 142 requires purchased intangible
assets other than goodwill to be amortized over their useful lives unless these
lives are determined to be indefinite. FAS 144 retains many of the fundamental
recognition and measurement provisions of FAS 121 with respect to the impairment
of long lived assets. We have performed quarterly assessments of the carrying
values of intangible assets recorded in connection with our acquisition of
AirBoss. The assessments have been performed in light of the significant
negative industry and economic trends impacting current operations, the decline
in our stock price, expected future revenues, and continued operating losses. In
the three months ended June 30, 2002, the Company recorded a non-cash impairment
write-down of the remaining AirBoss intangible assets of $719,000, the estimated
realizable value at that time. In December 2002, the remaining balances were
determined to be fully impaired and were written off based on the assessment
factors noted above as well as the Company's limited remaining financial and
technical resources.
See further discussion in the Note 5 in the Notes to Condensed Consolidated
Financial Statements.
Variable non-cash stock compensation
On November 5, 2001, the Company announced an offer to its employees with
outstanding stock options to exchange such options for new options to purchase a
different number of shares of common stock priced as of December 7, 2001. The
offer was voluntary and had to be accepted by individual option holders within
twenty business days after receipt of the offer. In order to participate in the
exchange, an Optionee had to exchange all of his or her existing options.
Options issued in the exchange vest and became exercisable in twelve monthly
increments, with acceleration in the event of a change in control. The first
vest date was December 31, 2001. The options were granted on December 7, 2001
with a price of $1.11 per share, which was the closing price for the Company's
common stock as reported by the Nasdaq National Market on that date. The options
expire on December 7, 2003. Other than changes to the exercise price, the
vesting schedule, and the expiration date, the new options have substantially
the similar terms as the exchanged options.
The exchange resulted in the voluntary cancellation of employee stock options to
purchase a total of 3,550,264 shares of common stock with varying exercise
prices in exchange for employee stock options to purchase a total of 3,275,000
shares of common stock with an exercise price of $1.11 per share. As of December
31, 2002 employee stock options to purchase 1,515,000 of these 3,275,000 options
remain outstanding.
This offer to exchange options constituted a stock option repricing for
financial accounting purposes, requiring the Company to use variable accounting
to measure stock compensation expense potentially arising from the options that
were subject to the offer, including options retained by eligible optionees who
elected not to participate in the offer. As these new options vest, at the end
of each reporting period, beginning with the three months ended December 31,
2001, the Company measures and recognizes stock compensation expense based on
the excess, if any, of the quoted market price of the Company's common stock
over the exercise price. Subsequent declines in the
16
intrinsic value of these new options and the retained options may result in
reversal of previously recognized expense. After the options become fully
vested, any additional compensation due to changes in intrinsic value will be
recognized as compensation expense immediately. Such variable accounting will
continue until each option is exercised, or forfeited, or canceled.
Because the closing price of the Company's common stock as reported by the
Nasdaq SmallCap Market on June 30, September 30 and December 31, 2002 was less
than the new option exercise price, no stock compensation has been recorded for
the three or nine months ended December 31, 2002, nor has any been recorded from
the date of issuance.
On June 11, 2002, the Company issued options to acquire 2,800,000 common shares
with an exercise price of $0.11 to its employees and directors. These options
vest monthly over a one-year period. These options are not subject to the
current variable accounting requirements.
Other Income (Expense)
Interest Income. Interest income decreased by $152,000, or 92%, to $13,000, for
the nine months ended December 31, 2002, in comparison to the nine months ended
December 31, 2001. This decrease is attributable primarily to lower cash
balances available for short-term investment.
Interest Expense. Interest expense was not significant in the nine months ended
December 31, 2002 and 2001 as we had minimal balances of capital lease and debt
outstanding.
Provision for Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Income
tax expense consists primarily of foreign income tax withholding on foreign
source royalties paid to the Company. The provision for income tax expense was
$25,000 for the nine months ended December 31, 2002 and $125,000 for the nine
months ended December 31, 2001. The decrease is due to the decreased level of
royalties received in the current fiscal year as compared to the same period of
the prior year.
Liquidity and Capital Resources
Our total cash and cash equivalents were $544,000 at December 31, 2002, compared
with $3,136,000 at March 31, 2002. Net cash used by operations in the nine
months ended December 31, 2002 was $2,569,000. This level of cash usage is
significantly lower than the $12,024,000 used in the nine months ended December
31, 2001, due primarily to various reorganizations and related cost cutting
measures, in particular the reductions in workforce implemented during in fiscal
2002. Our net loss for the nine months ended December 31, 2002, excluding the
non-cash items listed in our Condensed Statement of Cash Flows, depreciation,
amortization and write-down of goodwill and other intangible assets,
amortization of deferred compensation and the write down in the value of a
shareholder note was $1,265,000 and this resulted in the use of approximately
the same amount of cash. In addition, changes in our operating assets and
liabilities used $1,304,000. Of this amount, $868,000 was used to settle
liabilities resulting from our reorganizations and restructurings announced in
our prior fiscal year, including paid severance of $304,000 and lease
termination and contract settlement fees totaling $564,000. Although the
restructuring and reorganizations we implemented during fiscal 2002 did
significantly reduce our headcount and costs, as we have no significant revenue
generating operations remaining after our February 2003 release transaction with
Teleca, our liquidity will be based on our ability to collect our current
receivables, sell any of our other assets and limit our costs. We may not be
able to locate a buyer for these other assets on acceptable terms before our
financial resources have been depleted, which may force us into bankruptcy.
Purchases of property and equipment for the nine months ended December 31, 2002
and 2001 were $34,000, and $1,707,000, respectively. The capital spending in the
nine months ended December 31, 2001 was primarily due to the relocation and
consolidation of the AirBoss offices in New Jersey. Current fiscal year capital
spending has been curtailed and is generally only authorized when necessary to
increase service to a customer.
17
As of December 31, 2002 the Company has future minimum payment obligations of
approximately $585,000 remaining under non-cancelable operating leases having
terms in excess of one year excluding liabilities accrued under restructurings.
However, all but approximately $30,000 of these lease obligations pertain to our
facility in Macclesfield, England. As a result of our February 2003 release
transaction with Teleca, we do not currently expect to incur any further
significant liability for the leases of the Macclesfield facility. In addition,
we have recorded current liabilities totaling approximately $117,000 which are
estimated to be adequate to resolve the contractual liabilities remaining as a
result of contract terminations or disputes arising as a result of the
restructuring and reorganization activities of the prior fiscal year.
We currently anticipate that our available funds will be sufficient to meet our
projected needs to fund operations into the second quarter of fiscal 2004. This
projection is based on several factors and assumptions, in particular that our
current receivables are collected on a timely basis, and is subject to numerous
risks. Our future capital needs and liquidity will be highly dependent upon a
number of variables, including how successful we are in managing our operating
expenses, selling assets and how successful we are in settling our remaining
contractual liabilities. Moreover, our efforts over the last several months to
raise funds through strategic transactions or through the sale of AirBoss or our
legacy assets have been disappointing. As a result, any projections of future
cash needs and cash sources are subject to substantial uncertainty. If our
available funds are insufficient to satisfy our liquidity requirements, we may
be required to seek bankruptcy protection. Liquidation under any circumstances
can be an expensive and time consuming process and offers very little prospect
of any distributions to shareholders. These conditions raise substantial doubt
about our ability to continue as a going concern. Unless our projected resources
are unexpectedly diminished, we believe we have three-to-six months to find a
third party that might agree to acquire control of the Company on acceptable
terms. If we are unable to find such a third party, we believe it is likely we
would enter bankruptcy proceedings once we have collected the balance due from
Teleca and satisfied existing liabilities to the best of our ability.
RISK FACTORS
You should consider carefully the risks and uncertainties described below and
the other information in this report. They are not the only ones we face.
Additional risks and uncertainties that we are not aware of or that we currently
deem immaterial also may become important or impair our business. If any of the
following risks actually occur, our business, financial condition and operating
results could be materially adversely affected, the trading price of our common
stock could decline and the likelihood of there being any potential return to
shareholders would diminish.
Our auditors have issued a "going concern" audit report.
The report of independent auditors on our consolidated financial statements for
the fiscal year ended March 31, 2002 states that because of operating losses and
a working capital deficiency, there is substantial doubt about our ability to
continue as a going concern. A "going concern" report indicates that the
financial statements have been prepared assuming we will continue as a going
concern and do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Our auditors may not be asked to issue an audit report for the current fiscal
year.
The Company is obliged to comply with the Securities Exchange Act of 1934 and
related regulations until it is purchased or is liquidated. These obligations
include, among other things, regular reporting obligations and the requirement
to have the Company's financial statements audited by independent auditors. The
Company has traditionally used Ernst & Young LLP as its independent auditors. If
the Company is unable to enter into a change in control transaction soon, we
believe it is likely we will seek to liquidate the Company through bankruptcy.
In this event, there may be no need or resources for the annual independent
audit, although it is our goal to file our annual report on form 10k for the
fiscal year ending March 31, 2003, with the accompanying audited annual
financial statements. If an annual audit is performed, the audited financial
statements may need to be prepared on a liquidation accounting basis.
18
We have limited financial resources, a history of operating losses, are winding
down operations and expect to continue to incur losses--bankruptcy is likely
unavoidable.
Since inception, we have experienced negative cash flow from operations and
expect to experience negative cash flow. We currently anticipate that our
available funds will be sufficient to meet our projected needs into the second
quarter of fiscal 2004. This projection is based on several factors and
assumptions, in particular that our customers and Teleca continue to pay us on a
timely basis, and is subject to numerous risks. Nokia, in particular, may balk
at paying for the work performed by our UK subsidiary prior to February 2003
since we are unable to perform ongoing work as required by contract. This
receivable is approximately $500,000. Teleca might also default in its payment
obligations to us or fail to cooperate with us in minimizing our obligations to
third parties. We do not expect undue difficulty in these collection efforts but
are concerned that any legal action to collect might cost more than our
available resources would permit.
Our future capital needs and liquidity will be highly dependent upon a number of
variables, including how successful we are in realizing the value of the MS+ and
AirBoss intellectual property and other legacy assets and how successful we are
in settling our remaining contractual liabilities. We do not consider the sale
of most of these assets to be likely, rather highly unlikely. As a result, any
projections of future cash needs and cash flows are subject to substantial
uncertainty. If our available funds are insufficient to satisfy our liquidity
requirements, we may be required to enter bankruptcy sooner rather than later.
These conditions raise substantial doubt about our ability to continue as a
going concern. And barring some extraordinary form of transaction, it is likely
we would not continue as a going concern during the next fiscal year. Bankruptcy
is an expensive and time consuming process that offers very little prospect of
any distributions to shareholders.
We are currently dependent upon a single customer for almost all of our revenue.
One customer, Toshiba, a diversified electronics company located in Japan, will
account for approximately 25% of our revenues in the fourth quarter of fiscal
2003 and most of our limited revenue thereafter. These revenues are attributable
to license and maintenance fees for our MS+ technology. We have only one other
customer and we are not seeking additional customers (other than efforts to sell
our remaining legacy assets). As this revenue stream may be desirable to a
potential acquirer and is necessary to satisfy our outstanding obligations, any
disruption or decrease in it would be quite harmful.
Our inability to sell our remaining legacy assets could be harmful.
Although we have been able to sell certain patents and our GEOS-SC operating
system since our reorganization was announced in January 2002, and we continue
to explore the sale of our remaining assets, including MS+, there are very few
active prospects. We may not be able to locate buyers for these assets on
acceptable terms. Even if we are able to locate a buyer or buyers who are
willing to acquire these assets on terms that we believe are in our best
interests, the sale of these assets involves a number of risks and
uncertainties, including but not limited to the following:
o the completion of some asset sales will be subject to a number of
conditions, some of which are beyond our control, potentially
including stockholder approval;
o the asset sale process is expensive, and will involve legal,
accounting and financial advisor fees; and
o the asset sale process could take several months, and we may not
have sufficient resources to finance, our business until the closing
of the transaction.
Our stock is illiquid.
Because we failed to meet the minimum net tangible assets, stockholders' equity
and bid price requirements of the Nasdaq National Market, we transferred from
the Nasdaq National Market to the Nasdaq SmallCap Market in May 2002 and we were
delisted from the Nasdaq SmallCap Market in November 2002. Our stock is
currently quoted on the Over the Counter Bulletin Board (OTCBB), and has traded
as low as $0.015 per share recently, but there is no assurance that it will
continue to be quoted there. Investors should use caution in the absence of a
Nasdaq or stock exchange listing.
19
A change in control transaction is problematic.
Given our likely inability to achieve a shareholder quorum if sought and the
prohibitive costs associated with such efforts, we do not plan to attempt any
additional major transactions that would require shareholder approval. (In
attempting to secure shareholder approval for the Proposed Sale, the company
incurred obligations in excess of $100,000 over three months to no avail, even
though responding shareholders voted overwhelmingly in favor of our proposals.)
A change in control transaction remains a possibility, however, that we continue
to pursue because we do not believe that it would require shareholder approval
and could offer the prospect of at least some speculative return for
shareholders. Typically in this kind of transaction, a private business seeks to
acquire the "shell" of a virtually defunct or non-operating public reporting
corporation in order to have access to public equity markets. It can be far less
expensive than going public through an initial public offering. Frequently, this
is done through a merger where the public company has a number of large
shareholders who can assure approval. Since the Company's holdings are extremely
widely held, this would not be practical. However, a controlling share of new
stock in the company could be issued, if we considered the transaction to be in
the best interest of shareholders and creditors. The new business would likely
be unrelated to the Company's prior businesses and there would likely be a new
management team and board. The private business could also be very early stage,
i.e., a young business with prospects for success that are difficult to assess.
We do not consider a change in control transaction to be very likely in our
circumstances. There are several reasons, among others: first, given the
turbulent public financial markets, not many businesses want to be a public
reporting company (as regulatory compliance is expensive and liquidity is not
assured). Second, we are not a particularly good target because we have been
active in many businesses for many years. This increases the risk of unknown
contingent liabilities. Acquirers want "clean" companies with simple histories
and lots of cash. Although we are confident that unknown contingent liabilities
are limited, so are our cash resources.
We have limited experience in these types of transactions, cannot afford expert
investment banking advice given our limited resources and the small potential
transaction size and cannot assure shareholders that a change in control
transaction will result in a shareholder return better than any return in
bankruptcy. We may not even have sufficient resources to defray the professional
costs associated with negotiating and documenting a change in control
transaction. Unless our projected resources are unexpectedly diminished, we
believe we have three-to-six months to find a third party that might agree to
acquire control of the Company on acceptable terms.
At a minimum, we must try to manage the Company's resources in a manner that we
believe ensures that the Company's obligations to its creditors are lawfully
satisfied. And in any event, we will act in good faith with reasonable diligence
after due inquiry in making these determinations. We may conclude that the risks
associated with any change in control transaction are either too uncertain or
too substantial to warrant any action other than bankruptcy.
Any litigation could result in substantial costs and divert management's
attention and resources.
Securities class action lawsuits are often brought against companies in our
circumstances on various legal theories. Also, if third parties claim we have
infringed their intellectual property rights, we may be forced to pay for
expensive licenses, reengineer our work, engage in expensive and time-consuming
litigation, or abandon efforts to conclude a change in control transaction. Any
litigation could result in substantial costs, eliminate the prospects for any
change in control transaction and force an early bankruptcy.
You should not unduly rely on forward-looking statements contained in this
Report because they are inherently uncertain.
This Report contains forward-looking statements that involve risks and
uncertainties. We use words such as "believe", "expect", "anticipate", "intend",
"plan", "future", "may", "will", "should", "estimates", "potential", or
"continue" and similar expressions to identify forward-looking statements. You
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this report. The forward-looking statements contained in
this report are subject to the provisions of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks described above and elsewhere
in this document.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
We have derived and expect to continue to derive most of our revenue from
international customers. Our invoices to customers are generally denominated in
U.S. dollars and the levels of currency to be maintained in our international
subsidiary's accounts are kept at the minimal levels necessary for our
significantly reduced operations. As the result of the above, we are exposed to
foreign exchange rate fluctuations and as these exchange rates vary, the
subsidiary's results, when translated, may vary from expectations and adversely
impact our results of operations.
Item 4. Evaluation of Disclosure Controls and Procedures
(a). Evaluation of disclosure controls and procedures.
Our chief executive officer and our chief financial officer, after evaluating
the effectiveness of the Company's "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-14c and 15-d-14(c)) as
of a date ("the Evaluation Date") within 90 days before the filing date of this
quarterly report, have concluded that as of the Evaluation Date, our disclosure
controls and procedures were adequate and effective for the purposes set forth
in the definition of the Exchange Act rules.
(b). Changes in internal controls.
There were no significant changes in our internal controls or to our knowledge,
in other factors that could significantly affect our disclosure controls and
procedures subsequent to the Evaluation date.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In January 2002, the Company filed a demand for arbitration with the American
Arbitration Association in Oakland, California seeking payment of approximately
$100,000, which consisted of $88,000 in notes receivable plus accrued interest,
from Donald G. Ezzell, former general counsel and chief operating officer of
Geoworks, as the balance due on a note made for the purchase of Geoworks stock
by Mr. Ezzell when hired in 1999. We believe that the payment became due on
December 31, 2001. Mr. Ezzell denied liability and claimed fraud, breach of
contract, securities law violations, unfair business practices and the right to
recission. Prior to the arbitration hearing, a successor in interest to Mr.
Ezzell brought suit in federal court against us raising substantially the same
issues. In January 2003, these proceedings were settled, and the parties
released each other from all related liability. The note and the shares were
cancelled, and Mr. Ezzell made an interest payment of approximately $13,000 to
the Company.
Item 4. Submission of Matters to a vote of security holders
(a) On October 30, 2002, we filed a definitive proxy to obtain shareholder
approval of a share sale to Teleca and to obtain shareholder approval for
our plan of liquidation and dissolution if other desirable alternatives
did not arise in the near future. Management had recommended both
proposals. The Special Meeting of Stockholders, scheduled for December 11,
2002, was adjourned until January 8, 2003 due to lack of a quorum. The
meeting was subsequently cancelled on January 8, 2002 due to lack of a
quorum. Although, management expended significant costs and efforts to
obtain a quorum, including hiring a proxy solicitor, sending multiple
mailings to stockholders, and calling a number of shareholders personally
to encourage them to vote, a quorum was not attained in the legally
prescribed time frame.
(b) The matters described below were voted on at the Special Meeting of
Stockholders, although a quorum was not attained, the votes cast with
respect to each matter were as indicated.
1. To approve the sale of our UK professional services business to Teleca
Limited pursuant to an Agreement for the Sale and Purchase of the Entire
Issued Share Capital of Geoworks Limited dated September 23, 2002.
FOR 8,572,891
AGAINST 1,047,837
ABSTAIN 151,419
NON-VOTE 12,412,610
2. To approve and adopt the Plan of Liquidation and Dissolution described
in the Proxy
FOR 8,067,152
AGAINST 1,517,236
ABSTAIN 187,759
NON-VOTE 12,412,610
3. To transact such other business as may properly come before the special
meeting or any adjournment thereof.
FOR 5,989,209
AGAINST 1,597,250
ABSTAIN 2,185,686
NON-VOTE 12,412,610
22
Item 5. Other Information
Ceasing of Operations in the UK
As noted in management's discussion and analysis of operations, our limited
resources and the associated business risks made it unlikely that we could
continue to maintain a viable ongoing business in the UK. Faced with the
significant possibility of failing to meet our legal obligations to our
employees, creditors and customers, our board of directors approved a mutual
release agreement with Teleca (the "Release") that allowed Teleca to hire our
former UK employees and do business with our customers in an effort to minimize
our liabilities.
In consideration of this Release, Teleca agreed to pay the company approximately
$500,000, one half on signing the Release and the balance after ninety days.
Also, Teleca separately agreed to assume our UK subsidiary's remaining lease
obligations in exchange for use of the subsidiary's equipment. By agreeing to
enter this Release we estimate that we have avoided approximately $300,000 of
statutory employee severance and redundancy pay and over $400,000 of future
lease obligations. In addition, we believe that we have mitigated any exposure
we might have had to our primary customer, Nokia, by encouraging Teleca and
Nokia to deal directly with each other in order to limit disruption to Nokia's
activities.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
10.21 Mutual Release between Teleca and Geoworks dated February 1,
2003
10.22 Exchange Agreement between Teleca and Geoworks Ltd. dated
February 1, 2003
10.23 Settlement Agreement and Mutual General Release between Geoworks
Corporation and Geoworks Ltd. and Donald G. Ezzell and DGE
Capital Group dated January 8, 2003
b) Reports on Form 8-K
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
executive officer.
GEOWORKS CORPORATION
Date: February 13, 2003 By:/s/ Timothy J. Toppin
----------------------------
Timothy J. Toppin
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
24
CERTIFICATION
I, Steve W. Mitchell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Geoworks Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003 By: /s/ Steve W. Mitchell
----------------------
Steve W. Mitchell
Chief Executive Officer
25
I, Timothy J. Toppin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Geoworks Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003 By: /s/ Timothy J. Toppin
----------------------
Timothy J.Toppin
Chief Financial Officer
and Principal Accounting Officer
Each of the undersigned hereby certifies, for the purposes of section 1350 of
chapter 63 of title 18 of the United States Code, in his capacity as an officer
of Geoworks Corporation, that, to his knowledge, the Quarterly Report of
Geoworks Corporation on Form 10-Q for the period ended December 31, 2002, fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and that the information contained in such report fairly presents, in
all material respects, the financial condition and results of operations of
Geoworks Corporation.
Date: February 13, 2003 By: /s/ Steve W. Mitchell
----------------------
Steve W. Mitchell
Chief Executive Officer
Date: February 13, 2003 By: /s/ Timothy J. Toppin
----------------------
Timothy J. Toppin
Chief Financial Officer and
Principal Accounting Officer
26